Cap on Landlord's Claim Applies Only to Damages and Fees Resulting From Termination of Lease

In In re Kupfer, No. 14-16697, the Ninth Circuit Court of Appeals, in an opinion published on December 29, 2016, has determined that the cap on the amount of damages a landlord can claim under Bankruptcy Code Section 502(b)(6) applies only to damages directly related to the termination of the lease and not to collateral claims. In particular, fees related to litigating a landlord's claim for future rent were capped because such fees would not have been incurred absent termination of the lease. But fees related to litigating claims for past rent and for litigating a debtor's claims for breach of lease were not capped because such fees would have been incurred regardless of a termination of the lease.

In Kupfer, the debtors stopped paying rent and the landlord commenced an action in state court for breach of the lease and other claims. Debtors counterclaimed. The matter went to arbitration where the arbitrator found in favor of the landlord and awarded unpaid past and future rent as well as attorney fees to the landlord. Debtors then filed Chapter 11 bankruptcy. When the landlord filed a proof of claim based on the total amount of damages awarded in arbitration, the debtors objected saying that the claim amount must be capped based on the calculation provided in Section 502(b)(6) of the Bankruptcy Code. The Bankruptcy Court and the District Court found that Section 502(b)(6) capped past and future rent but not the fees incurred in the litigation.

The Ninth Circuit held that "damages resulting from the termination of a lease" capped under Section 502(b)(6) does not include damages related to claims a landlord would have if the lease had not been terminated. For example, fees attributed to litigating damages for past rent are not capped because a landlord could claim those damages independent of termination. But fees incurred in litigating "claims for future rent are capped, because such claims would not arise were the leases not terminated." The Ninth Circuit remanded the case so the District Court could categorize the claims as directly resulting from termination of the lease or not.

For the full opinion, please click here.

If you have any questions, please contact Melissa Lowe or any of the other attorneys at Shulman Bastian Friedman & Bui LLP at 949-340-3400.

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